Economics Answers

Wheat is produced under perfectly competitive conditions. Individual wheat farmers have U-shaped, long-run average cost curves that reach a minimum average cost of $3 per bushel when 1,000 bushels are products

a) If the market demand curve for wheat is given by QD = 2,600,000 - 200,000P, where Qp is the number of bushels demanded per year and P is the price per bushel, in long-run equilibrium what will be the price of wheat, how much total wheat will be demanded, and how many wheat farms will there be?

Discuss the characteristics of a Competitive Market

1. Use examples to explain the difference between absolute advantage and comparative (or relative ) advantage in international trade. (You can draw a table or you can explain) [6 marks]. Your answer must have references

1. Who would benefit and who would lose if the South African government doubled the tarriff on imported frozen chicken leg quarters from Brazil? Explain.

Hoover Ltd sells its vacuums to its overseas related distributor, Dustbuster Ltd and a local unrelated distributor Suck Ltd. Information available about the transactions of Dustbuster Ltd and Suck Ltd are as summarised below;


Dustbuster Suck Ltd
Price paid 15,000 13,500
Delivery terms CIF FOB
Quantity 95 100
Freight cost - 1,500
Insurance - 500
Credit period 60 days Upon dispatch
Interest rate on working capital 10% -
i) Which transfer pricing method is most appropriate (2 marks)
ii) Calculate the Arm’s Length price. (8 marks)

Vogue Co. provides administrative support Services (Invoicing and Book-Keeping). Mode Co. an Associated Enterprise requested Vogue Co. to provide it with invoicing services. Mode Co. thinks it needs about 1 hours of invoicing services. Total Cost of 1 hours of invoicing services is USD 120 as per Vogue Co. data. Independent Fad Co. provides comparable services. The P&L of B Co is as follows:-
Sales – KES 600,000; Labour Cost - KES 255,000; Other Expenses – KES 150,000; SGA Expenses – KES 95,000.

i) Which transfer pricing method is most appropriate (2 marks)

ii) What Transfer Price should Vogue Co. charge Mode Co. for 1 Hours of Invoicing Services? (14 marks)

VW is an overseas car manufacturer and distributor. It is the parent company of a Kenyan Company, VW.Ke. VW.Ke is a Kenyan distributor of Toureg cars. Dobie Ltd, a Kenyan company unrelated to VW has also been appointed by VW to distribute Tiguan cars in Kenya. The Kenyan market for both car models is similar. Besides distribution VW.Ke performs advertising, marketing and promotional activities. Dobie Ltd realises a gross margin of 20% from the sale of Tiguan cars to consumers.

VW.Ke’s sales to independent parties for the year was Shs 300,000,000. The marketing activities cost to VW.Ke was Shs 10,000,000.

i) Given the available information, determine the appropriate transfer pricing method and compute the transfer price. Show your workings. (8 marks)

Targaryen Ltd and Greyjoy Ltd are associated parties. Greyjoy Ltd is engaged in the manufacture of electrical goods of varied range. One of such goods is heating element which it sells to Targaryen Ltd which is engaged in the manufacture of electrical heaters where it uses the heating element purchased from Greyjoy Ltd as a raw material. Greyjoy Ltd is not selling the heating element to any of its other customers. Few comparable companies are available which are engaged in manufacturing similar products (heating elements) realizing an average mark-up of 10%.
The cost of manufacturing one heating element is Shs 5,000.

i) Which transfer pricing method is most appropriate (2 marks)
ii) Calculate the transfer price. (4 marks)

What are the three economic questions every nation must answer?

What factors are likely to cause an increase in the demand for british pounds (in exchange for south african rands)?[5 marks]